A quick guide to open and decentralized finance
Written by Barbara (Barb) Curry, Director of Operations
My job at Blokhaus is to look at things from a bird’s eye view and help my teammates navigate the complex pathways and intersections of projects, timelines, finances, and client priorities. I thrive on the challenge of understanding the unique needs of our clients and diving into the niche tech aspects of their businesses. If you're wondering what's going on in the dynamic world of fintech but need to be more oriented, let's hit the road together, and I'll guide you through the exciting landscape where innovation and finance intersect.
In the dynamic world of financial technology, two game-changers are shaking up traditional finance: Open Finance and Decentralized Finance (DeFi). Let's simplify things with an analogy because, honestly, it helps!
1. Open Finance: The Ground Transportation Network Upgrade
Imagine the financial landscape as a sprawling network of roads, train tracks, and bike paths where various financial institutions represent cities connected by many ground transportation routes. Open Finance serves as a significant upgrade to this diversified ground transportation network. As cities enhance transportation systems to improve accessibility, Open Finance focuses on optimizing and connecting existing financial infrastructure.
Open Finance is like the modernization of the ground transportation network, introducing innovations that improve the speed and quality of the travel experience, like building ring roads, widening highways, replacing traditional tolls with E-ZPass, and creating the much loved Waze app. In this upgraded system, financial data flows more seamlessly between institutions, much like well-coordinated traffic signals, ensuring a smooth journey for all forms of ground transportation.
ProTip: Open finance in the U.S. was enabled by the willingness of the central banks to provide access to customer’s data with the customer’s consent (open banking). It allowed third parties to innovate financial products and services at an unprecedented rate. Examples of Open Finance include Zelle, Moov, Robinhood, Rapyd, Affirm, Stripe, Chime, PocketGuard, Betterment, etc.
2. Decentralized Finance (DeFi): Building a New Skyway Network
Now, picture a financial revolution not just upgrading roads, routes, and vehicles but constructing an entirely new system in the sky – a skyway network. That's Decentralized Finance (DeFi).
DeFi imagines a future where financial transactions don't rely on traditional ground transportation. Instead, decentralized, secure, and transparent smart contracts operate like a futuristic skyway network, elevated above the ground and the train tracks, roads, and cars.
Decentralized Finance (DeFi) has the potential to revolutionize finance, much like commercial aviation transformed travel. Just as airlines made international travel accessible and reshaped global commerce, DeFi offers opportunities for individuals worldwide to participate in financial activities more efficiently, securely, and without intermediaries or translators. DeFi will likely shape how we save, invest, and transact, influencing the future of finance in profound ways.
ProTip: All DeFi relies on at least one or more blockchains (the skyway) and involves the transfer of cryptocurrency (money) that can’t be moved on the ground (traditional and open finance) because it has wings (airplane) but not wheels (car, train, etc.) Real-world examples of popular protocols supporting DeFi networks include Ethereum, Solana, Polkadot and more.
3. Coexistence: Transition from Ground Transportation to Skyways
As we embrace these transformative changes, it's crucial to recognize that upgrading existing ground transportation (Open Finance) and constructing new skyways (DeFi) can and will coexist for a significant period. The transition resembles a city with improved ground transportation options and futuristic skyways. Most transactions flow through upgraded ground transportation options during this period, offering users a familiar and optimized experience.
Yet, early adopters explore the advantages of the new skyways. This coexistence acknowledges the need for bridges and a smooth transition, ensuring everyone can navigate comfortably while the financial landscape evolves.
ProTip: Many DeFi apps have a user experience that can be confusing and frustrating, even for those who are technically inclined. However, companies like Coinbase, Kubera, Plaid, Bakkt, CoinTracker, and PKT have developed user-friendly features that enable everyone, regardless of technical expertise, to participate in the DeFi renaissance. Expect to see more of these user-friendly hubs emerging at the intersection of DeFi and Open Finance, making financial services more accessible to all.
4. Transition Analogy: Intermodal Transportation Hub
To facilitate this transition, envision a model where both upgraded ground transportation and futuristic skyways converge. This model represents interoperability, allowing users to switch between the two systems.
As the financial world progresses toward a future that combines the efficiency of Open Finance and the innovation of DeFi, it's essential to understand the massive opportunity at the intersection of both frameworks. The journey is not a sudden leap but a thoughtful exploration and evolution that must accommodate users’ needs and reduce consumer frustrations to succeed.
In this tech-centric era, where innovation propels us forward, Open Finance and Decentralized Finance stand as pillars reshaping how we interact with and perceive the financial world. The journey is ongoing, but with an understanding of these concepts, we can navigate the diversified grounds and skyways of the financial future, where innovations contribute to a holistic financial ecosystem.
5. Why this matters
Finance surrounds us, yet understanding FinTech, especially decentralized finance (DeFi), can be a mystery to many. But why should you care? Because by understanding FinTech, you gain the power to shape your financial future.
FinTech is not just a trend - we are surrounded by it. It's a tool that has empowered all of us to interact with banking systems, have more access to our financial standing, take control of future planning, and even interact in global markets previously off-limits to everyday people. When you explore FinTech, you will likely find more of this, and once you start exploring, it's hard to stop.